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Three Good Reasons to Improve Your Business: Fast Forwarding Planning onto Action

Type: Publications | Author: Terry Phinney
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If you are thinking about selling your business, be prepared.  Many owners lose up to 50% of the value when the business isn’t ready to be sold.  Before you engage an investment banker or broker, read this article, it will help you capture what you have earned.

We know that a healthy and improving business:

·         Generates good cash flow

·         Providessuccession options

·         Will increase in value

 

Yet, many owners sell their businesses when sales and profits are declining, not when the business is healthy. They receive a fraction of what they could earn if things were different.

What is the problem?

Owners are concerned about value and exit

Most owners are anxious about their business and their ability to retire. Some don’t have enough money to retire and their business may not be saleable. They may be right at their current market valuations.

Selling a business is always an option if there is agreement on value. Unfortunately, this is rarely the case as owners and buyers usually have different views. When the value gap is large, owners delay the sale, hope that things will improve and that the price increases. Most buyers won’t wait and they move onto other deals. The owner is left with a wasting asset and the value will continue to decline.

Contrary to an owner’s belief, buyers are usually rational

Prospective buyers usually make legitimate offers. In most cases, however, the owner thinks his business is worth more. As investors, buyers have decided what the business is worth to them. They know what should change and where they can improve margins and profitability. They have made educated assumptions about the business and its future as they consider all aspects including cost, productivity, revenue growth and new markets. Based on that information, they offer (what they consider is) a fair price. With their analysis, they know how the business could provide competitive returns and when the payback will occur on their investment. To them, it is simply a business that needs to be managed and improved.

 

There is “additional value” available in most businesses   

There is a method to a buyer’s madness when it comes to value. Buyers usually have template or a methodology that enables them to quickly determine what the business is worth. Many have seen or completed the buying process before and have reviewed a large number of possible deals. They use well-honed metrics to gauge the health and competitiveness of the business. They ask questions that may be deferred in many family owned businesses. The answers to these questions and other analysis uncover potential value that is available in the business. Most buyers admit their process isn’t rocket science but they use a disciplined approach that estimates value and the investment return associated with it. Given their investment requirements, it is not unusual that buyers look at many deals but complete only a few.

Owners do have choices

For many owners, narrowing the value gap means improving their business. It is their choice:  do the work and capture the benefits, or let improvement costs be discounted from the proceeds, when the deal is done. If the cost or scope of improvement is too large, however, the deal won’t get completed. Making the investment, now, gives the owner succession options and cash. Much of the improvement goes to the owner. By waiting, the decision is made for the owner and the net proceeds are usually disappointing.

Successful Value Improvements begin “one step at a time”.

Getting started is the hardest part particularly if the business is making a reasonable financial contribution and cash flow is stable. Most owners are typically “working in the business” and don’t have the time or the perspective to work “on the business”. They overlook improvements since they are usually managing the day to day requirements. They confess that they are running in place to keep the business going and it is a luxury to plan for the future. While they may be right, a simple approach can get things started, which is often the hardest part.

There are three questions about the business that can identify improvements and increase value.

1.       What is worth keeping: “we know it is good”?

2.       What needs to change:  “we agree it should be done differently or eliminated”

3.       What is missing and needs to be added: “we need it to succeed in the future”

 

With the answers to these questions, the owner can develop detailed action plans for improvement. Those changes can improve the value of the business and increase cash flow, putting money in the owner’s pocket.

1. What is worth keeping: “we know it is good?”

Identifying positives is a good place to start; there are many areas in any company that everyone agrees are “good and worth keeping”. Getting agreement that these are important areas is the first step. A secondary (but important) issue is whether other improvements can be made. The first cut focuses organizational agreement on the areas that do not really need to change rather than on incremental improvements.

Asking “what is good”, can elicit responses that may seem unrelated. Categorization and organization of the responses can come later after the agreement that “they are good and worth keeping”. Later categorization can specify why they are good and what good they produce. Building a stronger brand is often an outgrowth of this process and the underpinnings of branding are what are usually captured. 

 

 2. “What needs to change:  we agree it is better, if done differently or eliminated”?

As a next step, asking   what can be eliminated” can clear a lot of clutter. Most work processes grow organically without active checks or balances. Pruning and streamlining is usually needed and that process generates enormous productivity.  Listing “what needs to change”, similar to asking “what is good”, can be a messy task as many things are likely to surface. An efficient method is to capture the improvements and then assess each one with the following criteria:

·         Relative importance to the business,

·         Ease of change

·         Implementation and resource requirements

 

This analysis will identify the best path forward.

Many organizations create detailed lists and analysis as a first step and this is important. It is more important, however, to get agreement and visibility on the major challenges or “what needs to change” than the degree of change. If this process is started at an overview level and then narrowed, it is easier to move ahead. For example, implementing a new ERP system is usually more difficult than addressing pricing inconsistencies. Both will provide value but pricing can be easier to implement and get results sooner.

 

3. “What is missing and needs to be added: we need it to succeed in the future”

Similar to identifying positives and change areas, it is critical to ask “what is missing and needs to be added.” This area focuses on the future of the company and addresses growth or competitive constraints. The challenge is list the ingredients and then set priorities around the following:

·         Importance,

·         Value

·         Resource requirements

 “What is missing” could include many areas including products or geographic expansion. Underlying observations should be surfaced when the list is developed. These should be validated when the plans are developed.  Similarly, categorizations can come later if there is agreement that an area needs to be added.

 

Wrap it up- keep it simple-develop plans that can be implemented

Keeping it simple and getting agreement are the most important factors to moving ahead. Beyond that, simple plans get things done. Most managers and employees don’t want a litany of presentations. They do want clarity, simplicity and honesty. And, they want the transition to be manageable. Sounds easy, but the threads of change come from many areas and simplifying “what is changing,”  “what is not” and “what is missing” is critical for understanding and ownership.

Successful companies have found that keeping plans simple is very effective as the plans can be easily communicated and executed. This approach enables everyone to see what needs to be done and how they play a part in accomplishing the overall goals. Accomplishment breeds success, leading to greater ownership, which in turn leads to ongoing improvement. Change becomes a process rather than an event and is more likely to stick and produce results.

The plans are linked to Value

Buyers pay for future cash flow and growth. If the improvement plans are executed well, the path to a successful sale is clear. The remaining issue is how much value can be produced before the sale is made. That can depend upon market timing and the business of the acquirer.

Contact: tphinney@blackstonemgnt.com 617-462-0223